UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended MARCH 31, 2003
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
----------- ----------
Commission File Number: 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 04-2217279
(State of incorporation) (I.R.S. Employer Identification No.)
70 ORVILLE DRIVE, BOHEMIA, NEW YORK 11716
(Address of principal executive offices)
(631)567-4700
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [ x ] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of April 30, 2003: 960,541 shares outstanding of
the Company's Common Stock, par value, $.05.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ x ]
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
March 31, 2003
--------------
Current Assets:
Cash and cash equivalents $ 201,900
Investment securities 637,700
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 384,700
Inventories 603,100
Prepaid expenses and other current assets 39,800
----------
Total current assets 1,867,200
----------
Property and equipment at cost, less accumulated
depreciation of $378,300 155,000
----------
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $35,700 14,800
Deferred taxes 106,600
Other 68,700
190,100
----------
$2,212,300
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 76,100
Accrued expenses 157,800
Total current liabilities 233,900
Deferred compensation 38,300
Shareholders' equity:
Common stock $.05 par value 49,000
Additional paid-in capital 967,000
Accumulated other comprehensive loss, unrealized
holding loss on investment securities ( 3,300)
Retained earnings 979,800
----------
1,992,500
----------
Less common stock held in treasury, at cost 52,400
----------
1,940,100
----------
$2,212,300
==========
See notes to condensed unaudited consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
2003 2002 2003 2002
Net sales $ 792,600 892,000 $2,476,600 $2,686,000
Cost of goods sold 471,900 540,500 1,469,000 1,609,500
---------- ------- ---------- ----------
Gross profit 320,700 351,500 1,007,600 1,076,500
---------- ------- ---------- ----------
Operating Expenses:
General and administrative 166,600 219,100 637,400 633,200
Selling 63,400 46,700 140,000 130,300
Research and development 63,100 74,500 207,400 222,300
---------- ------- ---------- ----------
293,100 340,300 984,800 985,800
---------- ------- ---------- ----------
Income from operations 27,600 11,200 22,800 90,700
---------- ------- ---------- ----------
Other income (expenses):
Other - - ( 6,100) -
Interest 2,600 2,400 13,200 16,000
---------- ------- ---------- ----------
2,600 2,400 7,100 16,000
---------- ------- ---------- ----------
Income before income
taxes 30,200 13,600 29,900 106,700
Income taxes 6,400 3,000 6,400 32,000
----------- ------- ---------- ----------
Net income $ 23,800 $ 10,600 $ 23,500 $ 74,700
=========== ======== ========== ==========
Net income per common
share - basic $ .02 $ .01 $ .02 $ .08
Net income per common
share - diluted $ .02 $ .01 $ .02 $ .07
See notes to condensed unaudited consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Month Periods Ended
March 31, 2003 March 31, 2002
-------------- --------------
Operating activities:
Net Income $ 23,500 $ 74,700
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Gain on sale of investments ( 800) ( 4,400)
Loss on disposal of assets 6,400 -
Depreciation and amortization 48,500 48,100
Change in assets and liabilities:
Accounts receivable ( 108,700) ( 277,900)
Inventories 76,000 ( 25,600)
Prepaid expenses and other
current assets 23,400 42,200
Other assets 25,800 5,500
Accounts payable ( 8,300) ( 55,500)
Accrued expenses ( 23,400) 106,300
Deferred compensation ( 21,200) -
---------------- -------------
Total adjustments 17,700 ( 161,300)
---------------- -------------
Net cash provided by (used in)
operating activities 41,200 ( 86,600)
---------------- -------------
Investing activities:
Purchase of investment securities,
available for sale ( 227,000) ( 114,700)
Purchase of investment securities,
held to maturity ( 72,600) ( 310,200)
Redemptions of investment securities,
available-for-sale 80,000 175,300
Redemptions of investment securities,
held to maturity 110,600 156,500
Capital expenditures ( 51,900) ( 22,100)
Proceeds from sale of assets 31,000 -
Purchase of intangible assets ( 12,800) ( 700)
---------------- -------------
Net cash used in
investing activities ( 142,700) ( 115,900)
---------------- -------------
Financing activities;
exercise of stock options 6,600 46,100
---------------- -------------
Net decrease in cash and cash
equivalents ( 94,900) ( 156,400)
Cash and cash equivalents, beginning of year 296,800 275,400
---------------- -------------
Cash and cash equivalents, end of period $ 201,900 $ 119,000
================ =============
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 29,800 $ 6,500
See notes to condensed unaudited consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
General: The accompanying unaudited interim consolidated financial
statements are prepared pursuant to the Securities and
Exchange Commission's rules and regulations for reporting
on Form 10-QSB. Accordingly, certain information and
footnotes required by accounting principles generally
accepted in the United States for complete financial
statements are not included herein. The Company believes
all adjustments necessary for a fair presentation
of these interim statements have been included and are
of a normal and recurring nature. These interim
statements should be read in conjunction with the
Company's financial statements and notes thereto,
included in its Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2002. The results for the
three and nine months ended March 31, 2003,
are not necessarily an indication of the results
of the full fiscal year.
1. Significant accounting policies:
Principles of consolidation:
The accompanying condensed consolidated financial statements include
the accounts of the Company and Scientific Packaging Industries, Inc.,
a New York corporation and an inactive wholly owned subsidiary of the
Company. All intercompany items and transactions have been eliminated
in consolidation.
2. Inventories:
Inventories for interim financial statement purposes are based on
perpetual inventory records at the end of the applicable periods.
Components of inventory are as follows:
March 31, 2003
-------------
Raw Materials $ 498,000
Work in process 30,000
Finished Goods 75,100
-------------
$ 603,100
=============
4
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Net income per Common Share:
Basic net income per Common Share is computed by dividing net income
by the weighted-average number of shares outstanding. Diluted net income
per Common Share includes the dilutive effect of stock options and a
warrant.
Net income per Common Share was computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
2003 2002 2003 2002
------------------- ------------------
Net income $ 23,800 $ 10,600 $ 23,500 $ 74,700
========== ========= ========= ==========
Weighted average common
shares outstanding 957,474 945,296 954,180 924,117
Effect of dilutive
securities 32,776 75,063 41,865 89,542
---------- ---------- --------- ---------
Weighted average dilutive
common shares outstanding 990,250 1,020,359 996,045 1,013,659
========== ========== ========= ==========
Net income per common
share - basic $ .02 $ .01 $ .02 $ .08
======= ======= ======= ========
Net income per common
share - diluted $ .02 $ .01 $ .02 $ .07
======= ======= ======= ========
In addition to the shares subject to options which were included in
determining the diluted earnings per share, there were outstanding
unexercised employee stock options as of March 31, 2003 to purchase
56,000 shares of the Company's Common Stock at $1.875 to $2.40 per share,
and as of March 31, 2002, to purchase 16,000 shares at $2.40 per share
which were not included in the foregoing computation to determine diluted
earnings per share, because the options' exercise price was greater than
the average market price of the Company's Common Stock during the period.
4. Comprehensive Income:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting and displaying comprehensive
income in financial statements. There was no significant difference
between net income and comprehensive income for the three and nine month
periods ended March 31, 2003 and the three and nine month periods ended
March 31, 2002.
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SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this report are not based on historical
facts, but are forward-looking statements that are based upon various
assumptions about future conditions. Actual events in the future could
differ materially from those described in the forward-looking
information. Numerous unknown factors and future events could cause such
differences, including but not limited to, product demand, market
acceptance, impact of competition, the ability to reach final agreements,
adverse economic conditions, and other factors affecting the Company's
business that are beyond the Company's control. Consequently, no
forward-looking statement can be guaranteed.
We do not undertake any obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
Liquidity and Capital Resources
The Company's working capital as of March 31, 2003, increased $101,900
to $1,633,300 compared to $1,531,400 at June 30, 2002 primarily due to
certain long-term investment securities becoming current assets as of
March 31, 2003. The Company has available for its working capital needs,
a secured bank line of credit of $200,000 with North Fork Bank which
expires on November 1, 2003, all of which was available as of March 31,
2003, and is to bear interest on amounts advanced thereunder at prime
plus 1%. Management believes that the Company will be able to meet its
cash flow needs during the 12 months ended March 31, 2004 from its
available financial resources which includes its cash and investment
securities.
Results of Operations
Financial Overview
Net sales for the three and nine month periods ended March 31, 2003 were
$99,400 and $209,400 lower than the corresponding periods of the prior
fiscal year. The Company believes that the reduction in sales, which
began in the last quarter of Fiscal 2002, was the result of several
factors, principally the general economic slowdown which has affected
purchasing budgets of end-users of laboratory equipment and the
replacement in January 2002 of the Company by a competitor as the
supplier of the private label vortex mixer of Fisher Scientific Company,
a United States distributor of the Company's products. Sales to the
distributor, primarily the Company's Vortex-Genie (registered trademark)
2 Mixer and related accessories, accounted for 36%, 33% and 27%,
respectively, of the Company's gross sales for the years ended
June 30, 2001 and June 30, 2002 and the nine months ended March 31, 2003.
While the Company expects that the offer by the distributor of its
private label vortex mixer in competition with the Company will continue
to have an adverse effect on Company's sales, it also expects that the
recent inclusion of the Company's Vortex-Genie 2 Mixer in the 2-year
catalogue of the U.S.'s second largest distributor of laboratory
6
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
products, which also offers its own private label vortex
mixer, will at least partially offset the impact. A further offset will
be the sales derived from the recent product additions to the Vortex-
Genie line, namely the Vortex-Genie 1 and Vortex-Genie 2T.
The Company's profitability for the nine month period ended March 31,
2003 (the "Fiscal 2003 Nine Month Period") was negatively impacted by
costs of $72,300 incurred with respect to a proxy contest as to the
election of Directors and the Company's 2002 Stock Option Plan instituted
unsuccessfully by the Company's former Chairman of the Board, Chief
Executive Officer and President (the "Former CEO") in connection with the
2002 Annual Meeting of Stockholders.
The Company has significantly reduced its general and administrative
expenses as a result of the termination of its compensation obligations
to the Former CEO whose employment ended on August 29, 2002, partially
offset by increases in the salaries of its new Chief Executive Officer
who had been Vice President, Controller and Secretary and its Executive
Vice President who had been Vice President Commencing in January 2003,
the Company substantially increased its
marketing efforts and expenditures under its revised strategy for sales
growth with: (i) the employment of a Director of Sales and Marketing;
(ii) the entry into a long-term agreement providing for a material
increase in the services of its marketing consultant, who earlier had
been a marketing employee of the Company's principal customer and who was
elected a Director of the Company at the Annual Meeting of Stockholders
in November 2002, and (iii) an expanded promotion and advertising
program. No assurance can be given that these efforts and expenditures
will result in increased sales and be beneficial to the Company's
operating results.
The Three Months Ended March 31, 2003 Compared with the Three Months
Ended March 31, 2002.
Net sales of $792,600 for the three months ended March 31, 2003, were
$99,400 (11.2%) lower than net sales of $892,000 for the three months
ended March 31, 2002. The decrease was primarily the result of lower
foreign sales in the months of February and March, reflecting a general
slow-down in orders from foreign customers which has continued through
the date of this Report, coupled with higher-than-usual purchase orders
from a few foreign customers during the three month period ended March
31, 2002.
Despite the lower sales and fixed overhead costs, the gross profit
percentage for the three months ended March 31, 2003 increased to 40.5%,
compared to 39.4% for the three months ended March 31, 2002, principally
as a result of a reduction in factory labor personnel.
7
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
General and administrative expenses for the three months ended March 31,
2003 decreased by $52,500 (24.0%) to $166,600 compared to $219,100 for
the three months ended March 31, 2002, primarily as a result of (i) the
discontinuation of the compensation and benefits provided to the Former
CEO, partially offset by both the increases in the salaries of the two
executive officers of the Company and (ii) the expenses incurred in the
comparable prior fiscal year period under a financial advisor's agreement
which expired on March 31, 2002.
Selling expenses for the three months ended March 31, 2003 were $63,400,
a 35.8% ($16,700) increase from $46,700 for the three months ended March
31, 2002, primarily the result of the employment in January 2003 of a
Director of Sales and Marketing, and the increase in the services and
fees of the Company's marketing consultant.
Research and development expenses decreased by $11,400 (15.3%) to $63,100
for the three months ended March 31, 2003 from $74,500 for the comparable
period of the prior fiscal year as a result of the reduction of in-house
engineering staff and the engagement of a lower cost outside engineering
firm.
The Nine Months Ended March 31, 2003 ("Fiscal 2003 Nine Month Period")
Compared with the Nine Months Ended March 31, 2002 ("Fiscal 2002 Nine
Month Period").
Net sales decreased $209,400 (7.8%) to $2,476,600 for the Fiscal 2003
Nine Month Period compared to $2,686,000 for the Fiscal 2002 Nine Month
Period primarily due to lower unit sales of the Vortex-Genie 2 Mixer to
domestic distributors resulting from (i) increased competition and
(ii) the discontinuance of the Company as the supplier of the private
label vortex mixer for its largest customer, partially offset by an
increase in unit sales of the new Vortex-Genie 1 and Vortex-Genie 2T
mixers which were introduced at the end of fiscal year 2001.
Despite the lower level of sales and fixed overhead costs, the gross
profit of 40.7% for the Fiscal 2003 Nine Month Period exceeded the gross
profit of 40.0% for the Fiscal 2002 Nine Month Period, as a result of the
reduction in factory labor personnel.
The Company's general and administrative expenses for the Fiscal 2003
Nine Month Period of $637,400 included $72,300 of expenses incurred with
respect to the proxy contest referred to under "Financial Overview" above
and an increase in legal fees, but benefitted from the discontinuation
in August 2002 of the compensation and benefits payable to the Former CEO
partially offset by the increase in the salaries of its two remaining
executives, including the new Chief Executive Officer who had been Vice
President, Controller and Secretary. General and administrative expenses
for the Fiscal 2002 Nine Month Period of $633,200 included $56,000
incurred under a financial advisory agreement, which expired on March 31,
2002.
8
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
The expansion of the Company's sales and marketing efforts commencing in
January 2003, including the hiring of a Director of Sales and Marketing,
and the increase of the services and fees of the Company's marketing
consultant, resulted in an increase of $9,700 (7.5%) to $140,000 in
selling expenses for the Fiscal 2003 Nine Month Period compared to
$130,300 for the comparable period of the prior fiscal year.
Research and development expenses decreased by $14,900 (6.7%) to $207,400
for the Fiscal 2003 Nine Month Period from $222,300 for the comparable
period of the prior fiscal year as a result of the reduction of in-house
engineering staff and engagement of a lower cost outside engineering
firm.
Other income (expenses) of $6,100 for the Fiscal 2003 Nine Month Period
reflects the loss suffered upon the termination of a lease of an
automobile used by the Former CEO.
ITEM 3. CONTROLS AND PROCEDURES
a. The Company's Chief Executive Officer who is also the Company's
Chief Financial Officer, evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules
13-a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934,
as amended), (the "1934 Act") as of a date within 90 days of filing
this quarterly report (the "Evaluation Date"), and has concluded,
based on her evaluation, that as of the Evaluation Date, the
Company's disclosure controls and procedures were effective to
ensure timely collection, evaluation and disclosure of information
relating to the Company that would potentially be subject to
disclosure under the 1934 Act, and the rules and regulations
promulgated thereunder.
b. There were no significant changes in or any need for corrective
action as to the Company's internal controls or in other factors
that could significantly affect the internal controls subsequent to
the Evaluation Date.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings. However,
a financial advisor employed by the Company pursuant to an engagement
letter that was not extended by the Company beyond its expiration date
of March 31, 2002 asserted a claim against the Company in April 2002 in
the amount of $125,000 for alleged services rendered to the Company that
were alleged to be outside the scope of the letter. The Company denies
engaging the financial advisor for any services outside the scope of the
engagement letter or that any amounts are owing to the advisor. The
Company's counsel has advised the Company that based on its review of the
engagement letter and the Company's denial, it is unlikely that the
financial advisor will prevail if it institutes a legal proceeding.
9
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Additional Exhibits:
99.1 Certification pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K: On January 6, 2003 (amended January 22,
2003) the Company filed a current
report on Form 8-K with the Commission,
containing information under Item 5.
10
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Scientific Industries, Inc.
Registrant
/s/ Helena R. Santos
--------------------
Helena R. Santos
President, Chief Executive Officer,
Treasurer, and Chief Financial Officer
Date: May 14, 2003
11
CERTIFICATION PURSUANT TO
18 U.S.C. SS.1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Helena R. Santos, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Scientific
Industries, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a and
15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the registrant's Board of Directors:
d) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
12
5. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of my most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003
By: /s/ Helena R. Santos
--------------------
Helena R. Santos, Chief Executive Officer and Chief Financial Officer
13
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned as Chief Executive Officer and Chief Financial Officer
of the Company, does hereby certify that the foregoing Quarterly Report
of SCIENTIFIC INDUSTRIES, INC. (the "Company"), on Form 10-QSB for the
period ending March 31, 2003 (the "Report"):
(1) Fully complies with the requirements of section 13 or 15 (d)
of the Securities Exchange Act of 1934; and
(2) Fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Helena R. Santos
--------------------
Helena R. Santos
Chief Executive Officer and
Chief Financial Officer
Date: May 14, 2003
A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.
14